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Editor's Letter : Limited Options

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It may not have developed into the corporate bloodbath that many were expecting, but the stock options backdating scandal has taken a heavy toll on US business. In our cover story this month (see page 12), we find that the impact of the scandal has been felt in many areas of the corporate world. Some people have complained, for example, that the scandal will make it harder to attract and retain talent because it will make boards leery of offering huge stock option grants as bait for star performers.

For corporations, though, a bigger concern by far is the expense and hassle involved in untangling the mess created by the backdating. Many companies have already found themselves on the sharp end of angry—or perhaps opportunist—shareholders’ class action lawsuits, and if the cases are allowed to proceed, those firms might face many months of legal action. Others are having to fork out for taxes, additional compensation payments, legal fees and complex audits. The bill faced by companies implicated in the scandal has already topped $10 billion, according to one team of researchers. They have lost almost as much again in market valuation, as shareholders dump their holdings in anticipation of the troubled times ahead for those companies.

Corporate America has also, once again, lost out. As well as finding themselves under increased scrutiny from investors and auditors, businesses might also face even tighter regulation. Almost every time such behavior is uncovered, it triggers a knee-jerk reaction from regulators—and sometimes from legislators—who must, at the very least, be seen to be dealing firmly with any wrongdoing.

And while the wrongdoing involved in the stock options backdating game is certainly not on a par with that at the core of the Enron or WorldCom scandals, it is yet another example of companies getting into trouble by using a financial sleight of hand to get around irritating things like regulations and tax obligations. When investors see such behavior, they tend to be inclined to park their money elsewhere.

The most encouraging detail to have emerged from this debacle is that all the options grants under investigation appear to have taken place before Sarbanes-Oxley came into force. When the dust settles, we might see that this is an example of much-derided new regulations really working—to everyone’s benefit.
Until next month,